Export Natural Gas? Not So Fast

The astonishing boom in American shale gas production continues to change everything--perceptions of fuel abundance and scarcity, projections of the U.S. energy mix, and the price environment for renewables.

Now, the glut of cheap gas is driving another revolution: the pivot of discussion from anxiety about natural gas imports to debates about whether to export the fuel--something that requires approvals from the Department of Energy.

Michael Levi of the Council on Foreign Relations--who isn’t sure where he comes down on the new conundrum--has nicely articulated a number of possible complications to the standard argument that the United States should clearly export what is suddenly cheap here to European and Asian countries where prices are much higher.

Levi worries that exporting gas might increase the volatility of U.S. prices for the fuel. Likewise, he worries that price increases driven by exporting might impact domestic consumers more than they benefit producers and limit how much the United States is able and willing to cut its own greenhouse gas emissions--something it needs to do in order to be able to negotiate emissions cuts in developing nations. At the same time, Levi conversely believes there may be an environmental case for sending gas abroad since there are few cheap opportunities to substitute natural gas for oil in the U.S. and many abroad (though some of us would disagree on the latter point).

At any rate, these points are good, and the question of exporting is definitely layered. However, for all that I would like to add another perspective.

My view flows from the emphasis at the Metropolitan Policy Program on the long-run need to restructure the U.S. economy and move toward higher-value production and export activities.

Along these lines, I would place the overall well-being of higher-order U.S. industrial production at the top of my priority list, and consider the benefits of cheap natural gas to the growth and health of the U.S. economy. To be sure, having companies like Cheniere Energy liquefy and export natural gas to cash in on the spread between low U.S. prices and much higher European and Asian ones would allow U.S. producers to reap a bonanza and help cut into the U.S. trade deficit.

However, large-scale exports of natural gas could also tighten domestic supply and raise prices. For example, a consultant’s report estimates that Chenier’s big Sabine Pass (LA) export project will raise U.S. natural gas prices by up to 11.6 percent when shipments of more than 2 billion cubic feet of gas a day begin in 2015.

Higher prices for consumers, then, represent one possible economic drag on the nation’s recovery associated with exporting. Relatedly, higher costs to U.S. industrial producers have that potential as well. Today, nearly 45 percent of U.S. natural gas consumption flows to industrial concerns that use it to produce chemicals, fertilizers, metal, plastics, paper, refinery products, glass, and food products. Cheap natural gas is a critical input to numerous important production and export industries in America.

To pick just one example, the American Chemistry Society recently noted the potential for sizable job and output benefits in the chemical industry associated with the shale gas revolution. All of which suggests that cheap natural gas represents a point of competitive advantage for desirable higher-value industries, U.S. exports, and good-paying jobs.

My tentative conclusion: It would be premature for DOE to conclude the United States now has so much gas that it can afford to export it overseas without risking domestic price dislocations. At least for now, gas should be husbanded as a low-cost input to industrial production, as well as held as a high-potential, cleaner substitute fuel for use in the electric power sector to displace coal in generating plants and in the transportation sector to displace oil. In short, gas should be exported not in its raw form but only as a low-cost input to higher-value production and job creation by American companies.

Such are the sort of considerations that must increasingly inform the energy decisions of a nation that needs to--all at once--reduce carbon emissions and more actively attend to the emergence of a higher-value production economy.